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What Caused House Prices to Increase so Much Over the Years?

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There is a wedge between house price and its overall development cost. As shown by Khazanah Research Institute (KRI) in its
publication “Rethinking Housing: Between State, Market and Society”, house prices doubled from 2008 to 2016. How does this
happen? We have looked into depth to answer all your most pressing questions.

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1. What caused house prices to increase so much over the years?

Figure 1: Index of house prices and construction cost, by state, 2008 – 2016. © Adapted from KRI

Based on Figure 1, we can see that costs for the elements of development such as labour, materials, machinery and equipment
have increased only slightly in the same period. Such disproportionate increases have led to the conclusion that – the
developer’s pro t margin increase and the inef ciency of the country’s housing construction industry are directly responsible
for the skyrocketing house prices. While this is inevitable, one should not overlook other elements of development cost,
particularly the impact of land cost on house price.  

Figure 2: Median land price (RM per sq ft) in Selangor, 1990 – 2018. © www.brickz.my

In Selangor, for example, land prices have increased over the last decades, although there have been uctuations along the way.
Figure 2 indicates how land prices in Selangor change in a passage of time, from RM1.05 per sq ft in 1990 to RM42 per sq ft in
2018 – based on previous land transaction records.

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 Figure 3: Index of

house price, land cost, and elements of construction cost in Selangor. © CIDB, NAPIC, www.brickz.my

When compared, the growth in land price – with a compound annual growth rate (CAGR) of 7.8% – has outstripped the growth in
house price, material cost, labour cost, and machine & equipment cost; with a CAGR of 7.4%; 1.9%, 2.2%, and 0.6%, respectively
(Figure 3). One can also observe that land and house prices tend to move in sync. In this sense, the land price can be
considered as a signi cant contributor to the house price.

2. Why has land prices in second- and third-tier cities increased

signi cantly?
Apart from value appreciation through time, land price increases widely depending on a range of factors such as land use, local
planning regulations, proximity to main centres, whether it is serviced or has the underlying infrastructure, and so on. Locations
within markets with higher population growths, better economies, and more developed infrastructures are in higher demand;
while a remote parcel of land may have limited value as it does not have access to amenities, utilities, transportation or other
resources that could make the property useful.

Figure 4: CAGR (%) of land prices in selected locations in Selangor, 2012 – 2018.  © www.brickz.my.

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Between 2012 and 2018, land prices at different locations in Kuala Lumpur and Selangor have been changing at different rates
(Figure 4). In Semenyih, for example, land prices increased with a CAGR of 71.96%, followed by Sungai Buloh (37.81%), Batu
Caves (32.28%), Puchong (28.91%) and Seri Kembangan (22.77%). The similarity between these locations is that they are
considered as second or third-tier cities from the Kuala Lumpur city centre, but with signi cant demographic changes over time,
coupled with the increase in economic activities, the economic values of land in these areas have increased.

On the other hand, land price increment for rst-tier cities such as Kuala Lumpur, Subang Jaya, Ampang and Petaling Jaya is
much lower: 6.24%, 8.35%, 11.3% and 4.29%, respectively. Decrease of land prices is even found in areas outside the Klang
Valley region: Kuala Selangor (-0.64%), Puncak Alam (-1.09%), Selayang (-5.45%), and Sabak Bernam (-11.31%).

Figure 5: Median land price (RM/ft2) for selected areas, 2018. © www.brickz.my.

While the increases in the land price for the second or third-tier cities are high, their absolute land prices are still lower than
those in the rst-tier cities. As shown in Figure 5, the median land prices per sq ft of rst-tier cities such as Kuala Lumpur,
Subang Jaya, and Petaling Jaya are RM187.50, RM149.99, and RM146.59, respectively; as compared to those of second-tier
cities: Seri Kembangan (RM110.51), and Puchong (RM63.33); and third-tier cities: Sungai Buloh (RM59.86) and Semenyih
(RM29.73). 

3. How does land cost affect the development of affordable

housing like Rumah Selangorku?

Image source: The Malaysian Times

As one can observe, the data on land prices re ects the density gradients of the Klang Valley region. The closer the area is to
the central business district (Kuala Lumpur), the higher its population density; the higher the respective land prices and
housing development costs are going to be (Figure 6). This, to some extent, explains why most houses under the affordable
housing scheme are located at the outskirt areas that are not in favour of the homebuyers, due mainly to the unmet demand on
lifestyle and living environment. 

Figure 6: Land cost (RM/ft2) vs. distance from Kuala Lumpur. © www.brickz.my., Google Maps.

In free-market housing development where the unit selling price is subject to the market forces, land cost is residually
determined by house prices, construction costs, and developer’s pro t. Developers would not mind bidding a higher land price if
there is speculative room for the GDV to increase (a pro t margin with 15% of GDV is the threshold for developers). However, in
affordable housing developments where the unit selling price is xed, land cost becomes very signi cant and has to be
controlled to safeguard the developer’s pro t margin. 

This is especially true for the Rumah Selangorku (RSKU) housing development as the set speci cations – house size,
development density, community facilities, parking requirements – tend to limit the value of the land to be fully optimised. Any
increases in land cost will be sure to cause a reduction to the developer’s pro t margin; and hence, affecting the project viability.
As such, developers need to leverage on cheaper land cost when building affordable houses, to meet the capped selling price.

4. Why is 15% GDV so important to developers when it comes to

building affordable housing?

Image source:

homes.com

This percentage denotes the return on investment from the project – which spans more than 5 years until the expiry of the
defect liability period and nal closing of projects accounts. Since housing development is high risk and high capital
investment with a long gestation period, a pro t margin that is below 15% will render the venture not feasible. Therefore, land
cost plays a huge determining factor for the developers. 

The impact of land cost can be explored by studying the breakeven development cost and pro t margins of building RSKU Type
D houses. Assuming 600 units of 900sf Type D RSKU houses with the unit selling price of RM200k are to be constructed on a 5-
acre parcel of land with varying development densities (Figure 7).   

Figure 7: Pro t margins (% GDV) vs. land cost (RM/ft2) at different development density (units/acre) for building RSKU Type D houses (RM200k). © Dr Foo

When the allowable density is 120 units/acre, the maximum land cost for the breakeven scenario (where the development cost
equals to the capped selling price at RM200k) is RM98 per sq ft. The project becomes nancially not viable if it is located in
Subang Jaya, Petaling Jaya, Batu Caves, Seri Kembangan, as well as in Balakong. The project is also not viable in areas like
Kuala Selangor, Semenyih, Sepang, Ijok, Puncak Alam, Banting, and Sabak Bernam – although the pro t margin is higher –
because the maximum allowable density in these areas is 100 units/acre based on the RSKU requirements.

Only when the allowable density becomes 90 units/acre or even 80 units/acre, it would be considered nancially viable in third-
tier cities as land cost in these areas are below RM42.5 per sq ft. As such, the building of RSKU Type D houses is unlikely to be
undertaken by developers.

Figure 8: Pro t margins (% GDV) vs. land cost (RM/ft2) at different development density (units/acre) for building RSKU Type E houses (RM250k). © Dr Foo

To note, cities under the governance of MBPJ, MBSJ, and MBAJ are allowed to build RSKU Type E with the capped selling price
of RM250k. However, a reasonable pro t margin with 15% of GDV can hardly be achieved because there are fewer chances to
obtain land with price below RM95 sq ft in these areas. For example, in Figure 8 above, one can observe that only projects that
are located in Ampang, Cheras, and Puchong are considered as viable (with pro t margin > 15%) from the developer’s point of
view. 

5. Why are there so few choices in the affordable housing sector?

Due to local planning requirements and traf c conditions, not every location is allowed to build at a density of 120 units per
acre. In this sense, the reduction of allowable density can have an impact on the pro t margins; thereby limiting the selection of
suitable locations for the construction of RSKU Type E houses. For example, if the allowable density is reduced to 100
units/acre, a reasonable pro t margin can no longer be achieved in areas like Ampang and Cheras, as land prices in these areas
are higher than RM68 per sq ft. This project’s viability would very much depend on having a land price that’s below RM95 per sq
ft and an allowable density of 120 units/acre.

Based on the above, it is proven that the margins for building RSKU Type D are near to non-existent; not to mention the building
of RSKU Type A (RM42k), Type B (RM100k), and Type C (RM150k) houses, which have lower capped selling prices. 

The policymakers should realise the fact that project viability is the key to project completion, inclusivity, and sustainability.
Rather than passing on the responsibility of building affordable housing to the private sector through mandatory requirements,
the state government should also be involved in affordable housing development as well – in the form of providing incentives –
to enhance the ef ciency of RSKU development.

Among the incentives that can be undertaken by the state government are: 
to provide cheaper land, or better yet, free land to developers for them to build RSKU; 
to alienate land at lower premium cost; 
to give faster approvals for RSKU development; 
to offer tax incentives for developers to build RSKU; 
to adopt an automatic release mechanism of Bumiputra unsold units; and 
to legalise cost to lay the last mile of utilities to be borne by utility companies. 

This article was repurposed from "How much have land prices increased in KL & Selangor and what is the impact on affordable housing?", rst published on iProperty.com.my .

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